Understanding Your Student Loan Opportunities

Debunking the Maze of Federal Student Loans and Processes

The student loan maze has become a challenge for the average American college-bound student as well as their parent. Without the proper understanding of the system and the types of financial aid available, students are unable to make educated choices regarding college.

Two different types of student loans have come to figure prominently in almost any college student’s education: federal loans and private or alternative student loans.

Federal System of Student Loans

The federal government offers two sources for federal loans: the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program (FFELP).

The FFELP was designed to provide wider access to federal loans as administered through eligible student loan lenders. The loans are very similar to the Direct Loans, barring a few exceptions. Hundreds of lenders across the country offer the FFELP.

The Direct Loan Program is administered directly through the U.S. Department of Education.

Federal Loans

The following loans represent millions of dollars in federal aid. Annually students and parents apply for funds dependent upon various criteria.

Stafford Loans

Stafford Loans have almost become a household name. The loans are the most widely disbursed student loan. Almost every college student qualifies for some degree of funding:

• Stafford Loans are available through the Direct Loan Program and FFELP lenders.
• Subsidized Stafford Loans are administered to financially needy students and come bundled with the agreement that the federal government pays the interest while students are in school or during the new grad grace period.
• Unsubsidized Stafford loan recipients are responsible for the interest payments once the loans are fully disbursed to their schools.
• Students enrolled at least half-time may apply for a Stafford Loan.
• Loans through either party require no credit check.
• Following graduation borrowers have a six-month grace period before repayment of the loan begins.
• Borrowers qualify for graduated loan amounts for each year they apply.
• Students that apply independently qualify for more aid.
• A fixed interest rate of 6.8 percent is applied to all Stafford Loans.

Parent PLUS Loans

The Parent PLUS Loan offers parents of dependent college students access to federal funds so they can reasonably put their kids through school. College tuitions have made anything but reason out of the financial end of it, but PLUS Loans continue to be popular vehicles. The following criteria and features apply to the Parent PLUS Loan:

• PLUS Loans are offered through the Direct Loan Program or via a FFELP lender.
• Students for whom the funds are borrowed must be dependents and in school at least half-time.
• Parents are subject to a credit check.
• Parents with poor credit may qualify with co-borrower or co-signor.
• Eligible borrowers may apply for loans equal to the outstanding balance of the tuition. Other forms of aid must be applied first, such as the Stafford Loan.
• Repayment begins once the loan is fully disbursed.
• Direct PLUS Loans have a fixed interest rate of 7.9 percent while FFELP PLUS Loans are fixed at 8.5.

Graduate and Professional PLUS Loans

A few years ago the federal government added the Graduate/Professional PLUS Loan to its crew of student aid products. This loan gives graduate students more flexibility to access federal monies. The rationale? Most grad students are independent and academic costs increase with the degree. The following criteria and features apply:

• Students must first apply for Stafford Loans.
• Loans may cover the balance remaining on the borrower’s tuition.
• Graduate and Professional PLUS Loans may be accessed via the Direct Loan Program or through a FFELP lender.
• Applicants are subject to a credit check, but in the case of poor credit may borrow with a co-borrower.
• Direct loans have a fixed interest rate of 7.9 percent and the FFELP loans are fixed at 8.5.
• Borrowers must be enrolled in a college program at least half-time.

Perkins Loans

Although the Perkins Loans are federally funded student loans the government classifies them under “campus-based aid.” Simply put, the Perkins Loan is disbursed directly through a student’s campus with funds provided by the government. Sometimes individual campuses roll in a percentage of funds out of their own coffers:

• Eligible borrowers may be undergraduate or graduate students.
• Applicants must prove dire financial need.
• The key to receiving a maximum award is to apply early. Campuses only have so much in their Perkins coffers; when it’s gone, it’s gone. Maximum annual awards are $4,000.
• Amount of the Perkins Loan awarded is determined by the amount of other federal aid disbursed to the borrower.
• Borrowers receive a nine-month grace period following graduation before repayment begins.
• Interest rate is fixed at 5 percent.

Applying for Federal Student Loans

Any student that wishes to be considered for federal student loans, either through the Direct Loan Program or an FFELP lender must first complete the Federal Application for Free Student Aid, a.k.a. the FAFSA. Ironically the FAFSA is the key to federal aid; without it, a student is ineligible for consideration. In fact other student loan entities require the FAFSA for consideration under their own programs. Unfortunately, the form is notorious for its complexity. Lenders as well as high schools around the country have addressed the issue in recent years. Seminars and informational help sessions have become a commonplace calendar event. Parents and students confused over the federal student loan process, including the FAFSA, crowd into auditoriums and lecture halls to fill up on the counsel of financial aid professionals. Many more receive hands-on help filling out the FAFSA itself.

• Deadlines are a constant confusion. The federal deadline for the FAFSA differs from year to year, but is either at the end of June or the beginning of July. Applicants that will apply for state aid that requires the FAFSA, must adhere to state deadlines, which could be as much as a month earlier.
• Students are advised to complete and submit the FAFSA regardless of assumptions about eligibility for aid.
• Applicants must be prepared to provide information regarding income taxes, household income, auxiliary debt, bank account information and offer up social security numbers and drivers license numbers.

Repaying Federal Student Loans

Flexible repayment options are another feature of the federal loan program. Borrowers choose among the following types of repayment plans that take into consideration a range of financial situations:

• Standard repayment terms are the default. Borrowers typically have 10 years to repay and payments are a consistent combination of both principal and interest.
• Graduated repayment terms feature lower payments at the beginning of the repayment that gradually increase through the life of the repayment.
• Borrowers with consistent income problems may apply for the income contingent repayment plan. Monthly payments are based on current income and are often well-suited to new grads with less than desirable employment. Direct Parent PLUS Loan borrowers are ineligible for this repayment option.
• Extended repayment is offered to borrowers with more student loan debt than the norm. Monthly payments are lower over a an extended period of time, which means you pay more in the end.

Alternative Student Loans

Alternative student loans, sometimes called private student loans, offered through student loan providers and private lenders give students a typically more affordable option than general signature loans. The development of alternative loans was spurred along by the growing gap between federal loan awards and the skyrocketing costs of college tuitions everywhere.

Many of the FFELP lenders have added at least one type of alternative loan to their student loan lines. And many private banks now feature a private student loan product. In some cases lenders now offer a variety of alternatives. Because most federal loans exclude some types of higher education, such as continuing education, professional and technical programs and distance learning or online degrees, lenders have found a new niche market for more targeted alternative loans.

Unlike the federal loans, borrowers interested in alternative loans must apply directly through the lender. The FAFSA is completely unrelated. The following features are common among alternative student loans:

• Borrowers are subject to credit checks. In the event of poor credit, borrowers may apply with a co-borrower.
• Variable interest rates are common and borrowers with good credit or a co-borrower with good credit may be granted a small discount on the interest rate.
• High loan limits make it possible for both undergraduates and graduate students to cover the costs associated with high-dollar programs.
• Many loans only require borrowers to pay interest while in school.

If you are in the market for student loans, your chances at winning the best loans and other aid are directly relative to your understanding of the components in the system: types of federal loans, how to apply, how to repay, and types of alternative loans.